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After Rapids of Refinance, Quality Mortgages Calm the Waters

It’s a little-known fact that California is home to the world’s largest and most productive water system, which serves more than 30 million people and irrigates more than 5.7 million acres of farmland. As massive as it is, however, it’s also one of the most unpredictable water systems.

Normally, massive amounts of snow melt off the Sierra Nevada mountains and rivers rage with water, filling the Central Valley. But in drought years, the state must rely on other sources, including reservoirs, groundwater and increasingly, seawater desalination plants. And invariably, water quality is impacted when water is scarce.

The mortgage industry is experiencing a very similar dynamic right now. For the past two years, as rates plummeted to historical lows—due largely to outside factors—originators and servicers have enjoyed the rushing rapids of origination volume. Now that rates are rising and refi volumes have slowed, organizations need to find other areas of growth, such as non-QM loans and mortgage servicing rights.

But like California’s water system, loan quality becomes an issue when volumes are slow—which means most organizations are facing some very significant decisions.

Where We’re Heading

One day, mortgage lenders, servicers and investors may look back on 2021 as a unique time in the mortgage industry. It was a period of many waves set off by external market influences and fueled by the Fed’s quantitative easing policies, which pumped $128 billion into the economy every month. With lower rates, an unprecedented number of Americans refinanced their homes, many of them twice, while millions of buyers competed with inflated home prices. Indeed, we may never see a market like it again.

Mortgage lenders can be forgiven for responding to these forces in knee-jerk fashion rather than focusing on planned, strategic growth—they had little time to do otherwise. Most hired feverishly to deal with capacity issues, dangling hefty bonuses for skilled underwriters and loan officers and removing overtime limits. Others outsourced some or all their processing work either to augment staff, increase efficiency, or both. By large, almost every organization saw revenue growth, but also thinning margins and quality degradation.

Today, the mortgage rapids are no longer raging, and a completely different picture is taking shape. Lenders are focused on preserving revenues, repairing margins, and, in some cases, reducing staff. Higher rates and inflation dropped loan volume more quickly than most of us anticipated. There was no six- to nine-month winddown. It felt more like a drop off a cliff.

Despite this new reality, many originators we talk to expect to grow. But the reality for them is, with refinance business gone, they are losing a third of their business, so they need to increase volume by more than one-third to grow. Many are now asking, “what other types of loans can we originate?” And for the most part, these “other types” are non-QM loans, which have a broader credit box and a higher risk profile. We’re now seeing originators roll out this higher risk product because they need the volume.

This is a night and day switch for most originators. When everyone was making hay with refi’s, quality was less important, because it was mostly about client retention. All the major underwriting factors were present and known for the most part, there was no real change to the borrower’s risk profile. With non-QM loans, the underwriting is completely different. Lenders can try to generate the same amount of volume, but the product mix is going to carry much more risk.

For mortgage servicers, opportunities crop up in the purchase of MSRs, because higher rates mean they’re making more money. But servicers also face additional risks, including heightened oversight and enforcement. This is happening at a time when the financial situation of many borrowers has not changed, and with the foreclosure moratorium now gone, an increase in foreclosures is on the horizon—in fact, it’s already starting. This also means loss mitigation efforts are picking back up as well.

Why Quality Matters More

When California experiences low snowpack and its rivers slow down, water quality becomes a major issue. In fact, it’s during dry seasons that California’s water quality suffers. Lower stream and river flow often result in a higher concentration of water pollutants, while rising temperatures in lakes and reservoirs lead to reduced oxygen levels that also impacts water quality.

Again, the mortgage industry experiences something similar, but for different reasons. One might think that with less volume, originators have more time to focus on improving loan quality. But the opposite is often true because they also must spend their resources on growing business.

Organizations are also under increasing pressure to maintain quality. Many federal and state agencies cut originators and servicers some slack during the pandemic to keep business moving. But that’s now over, and there’s a cost to both lenders and servicers who choose not to fall back on sound business principles of making sure what they’re doing is done right.

When mortgage rapids slow, state and federal regulators and investors have more time to think about quality, too. According to Matt McVay, director of quality control at The StoneHill Group, these agencies have become very active in recent months and are busy peeking over the shoulders of lenders and servicers, looking for incomplete or incorrect disclosures, miscalculated fees, and missed timelines.

“Investors are looking more closely at organizations as well, which may lead to increasing numbers of repurchases,” McVay says. “So are Fannie Mae and Freddie Mac, which are already encouraging originators to pass on feedback to appraisers and appraisal management companies (AMCs) and hold them accountable for the quality of products they deliver. Agencies and regulators are also on the lookout for bad loans and all types of servicing functions, and handing out fines, which means organizations will need to shift resources toward loss mitigation and creating sound defenses for repurchases and audits.”

Decisions to Make

Given the need to find new ways to generate business while spending more attention to quality, many organizations that outsourced quality control functions to third parties may be inclined to bring these processes in-house. Before doing so, however, they should think about the consequences of this decision and how it will affect their margins, and perhaps consider other options.

Keep in mind that, by internalizing quality control and using existing staff, organizations that may be causing quality issues will now be responsible for fixing them—on top of finding ways to generate more business. In doing so, they will also be deploying precious human resources on a function that is purely expense-driven and is directly in conflict with the of maximizing revenues and improving margins.

Lenders and servicers need to ask themselves what is core to their business—is it originating and servicing loans, or is it being a quality expert? It has been said an organization should never outsource a process or function that is a core competency. However, the inverse of that also bears truth. In other words, an organization should not internalize a process or function that is not a core competency.

For example, an originator may consider their post-closing processes core to their business. But is it really a core competency? Are they optimized to perform post-closing in a cost-effective manner, especially for new products such as non-QM loans? Is managing quality truly how they add value to the marketplace? Or are they better leaving post-closing to experts who understand the regulations and to whom post-closing is a core competency, so they can focus their attention on serving customers?

One way or another, every organization is facing these decisions. And invariably, the choices they make will affect margins. The good news is there is still time to think strategically about which path makes the most sense for their organization, unlike 2021, when raging waters forced many into making kneejerk decisions just to manage capacity. Today, they have more time and control to manage resources wisely and take ROI into account.

In most cases, continuing to outsource quality may be in an organization’s best interest. Doing so enables organizations to continue deploying their assets on activities that generate revenue rather than create additional expenses. If they already have a trusted quality control provider, that provider should be able to help identify new areas of risk when pursuing new business opportunities, whether these opportunities lie in loan products that demand stronger risk management or obtaining MSRs that require enhanced reviews.

It’s important to remember that, while every mortgage cycle is unique, our industry is in truly unprecedented territory. We’ve just left one of the most phenomenal origination markets we may ever see; one that was shaped and inflated by outside forces, and we’re now experiencing the highest interest rates we’ve seen in years, which will inevitably lead to a contracting and more difficult origination market and soaring MSR volumes.

Like any market transition, there are an equal number of challenges and opportunities. But like the millions of Californians who rely on clean water for their families and crops, no organization will be able to successfully navigate today’s mortgage landscape without paying attention to quality.

Of course, quality has never been unimportant. As Henry Ford said, “Quality means doing it right when no one is looking.” But quality is at least equally important when everyone is looking. And in 2022, you can be sure they will.

This article was written by Patrick Gluesing, EVP, Head of The StoneHill Group, a Sourcepoint company and was originally published on MBA NewsLink.

How the mortgage industry can mitigate risks in 2022

The past couple of years may one day serve nostalgic for mortgage originators. With record low mortgage rates and soaring homeowner equity, lenders had a historic level of refinance opportunities. It has been, in many ways, the best of times.

However, a completely different picture has emerged. Higher interest rates have caused rate/term refinances to evaporate and prompted the Mortgage Bankers Association to lower its origination forecast for 2022. Meanwhile, higher home prices are shutting out many potential homebuyers. In fact, in late 2021, the National Association of Realtors reported only slightly more than one-quarter of the purchase market were first-time buyers.

As a result, lenders are beginning to venture into new arenas, including non-QM lending. That means they’ll need to dig deeper into unique employment terms and income streams as well as credit complexities and new investor requirements that some underwriters have never seen before.

The picture is no less challenging for servicers, who face increased regulatory enforcement as a result of COVID and a more active market for mortgage servicing rights (MSR) trades that will foster greater risk. Every time there’s a trade in MSRs, there is an impact to the borrower and heightened scrutiny for the originator and servicer. Even something as simple as a new payment address has the potential to cause a missed payment and inadvertently put a dent into a borrower’s credit.

Yesterday’s QC is Not Enough

For both mortgage lenders and servicers, quality control must take center stage. Risk management, compliance and manufacturing quality in all phases of the mortgage chain should be on the minds of every organization.  

For originators, post-closing QC as it has been done over the past two years will not cut it this year. Origination QC, pre-funding QC, and targeted discretionary reviews should all be part of their production strategy.

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The five C’s of mortgage post-closing

For servicers, timeline management and making sure loan program and legal requirements are followed all represent high-risk areas. Attention to detail while boarding new loans will become paramount as well. Servicers that fail to provide consumers with the accurate information will run the risk of legal action, not to mention the potential for reputational risks.

As more loans end up in default following the pandemic, more bankruptcies, foreclosures and loss mitigation issues will follow. In fact, foreclosure filings were already up 39% in the first quarter compared to the previous quarter, according to ATTOM’s Q1 2022 U.S. Foreclosure Market Report. All default-related activities must follow a legal framework and protocols to maintain loan histories, timelines, and processes prior to and after boarding loans.

Now’s the Time to Ask for Help

The services that third party QC and due diligence providers can do today would represent a major investment if performed internally. While some financial institutions do choose to handle compliance and risk management in-house, many are opting for a trusted third party. And they don’t have to break the bank to get it.

In fact, QC and due diligence expertise from third parties can provide top shelf risk and compliance management at variable per unit costs. That means no need to train or retrain people on new technologies or performing reviews of purchase originations or servicing trades.

Looking forward, it’s experience that will win the day — which is exactly why Sourcepoint recently acquired The StoneHill Group, one of the most respected QC providers in the industry today.

Over the past three decades alone, we’ve seen some of the best of times and the worst of times in real estate finance. Thankfully, the lessons we’ve learned over the years helped produce the knowledge, expertise and technologies that we’re using to help mortgage organizations overcome today’s market challenges. The risks may be larger than ever, but we’re more than ready to take them on.

Featured Resource

Download the HFS Research: From outsourcing to innovation: partnering to revolutionize mortgage servicing that analyzes how outsourcing can be a gateway to innovation and adoption of emerging technologies in the mortgage servicing business.

New Year, New Challenges, New Services!

Consumer Loan Quality Control Reviews

  • Personal Loans (unsecured and secured)
  • Auto Loans
  • Solar Energy Loans
  • Construction Loans

You provide us your guidelines for each review, and we will customize our reviews to meet your audit scope. 

VA SAR Reviews

  • Desk Review of Property Appraisal-Collateral
  • Review of SAR Documents
  • Validation the SAR complied with all regulations and timeliness guidelines
  • Validate the VA Underwriter/Staff Appraisal reviewer completed the approval Documents per guidelines.

Home Equity Underwriting

  • A customizable mortgage underwriting solution
  • Underwrite to your lender guidelines and investor requirements
  • Over 15 years of experience underwriting loans

**We do not accept Texas Home Equity loans.

Want to learn more? Contact our sales team for more information at sales@stonehillgroup.com.

StoneHill Acquisition Completed

The StoneHill Group (TSG) is pleased to share that our equity acquisition by Sourcepoint, announced in early November 2021, closed on Friday, December 24, 2021, having received all regulatory approval.

This combination will help us to continue to grow and deliver best-in-class results for our clients while simultaneously opening new services under an existing master services agreement.  Sourcepoint, headquartered in Palm Bay, Florida, is one of the nation’s leading providers of outsourced mortgage services and solutions. With the addition of Stonehill’s expertise in Quality Control, Due Diligence and Fulfillment we strengthen our position as the premier provider of Originations, Servicing, Capital Markets, Title & Post-Closing services in the US mortgage market.

Please feel free to contact me, or your primary TSG contact, with any questions.

Kind Regards,

 

Patrick Gluesing

EVP, Head of StoneHill

Important Announcement About StoneHill’s Continued Evolution

Atlanta, GA – November 10, 2021

We are pleased to share some exciting news about our growth and evolution that was announced today.   Sourcepoint, a Firstsource company, has signed a definitive agreement to acquire our company and we anticipate the transaction to be closed by the end of 2021, subject to customary regulatory approval.

Inherent in this decision, TSG has been focused upon the benefits that this strategic transaction will offer to our clients and employees. Sourcepoint, headquartered in Palm Bay, Florida, is one of the nation’s leading providers of outsourced mortgage services and solutions.  Stonehill’s expertise in Quality Control, Due Diligence and Fulfillment are a great complementary fit for Sourcepoint and strengthen its position as the premier provider of Originations, Servicing, Title & Post-Closing services in the US mortgage market.  This combination will help us to continue to grow and deliver best-in-class results for our clients while simultaneously opening new services under an existing master services agreement.

Sourcepoint parent, Firstsource, is a rapidly growing organization with over 27,000 employees across the US, UK, India, and the Philippines. It serves industry leaders in Financial Services, Healthcare, and Communications, Media & Technology industries.

TSG’s entire management team, our current organizational structure and our operational, client services and sales contacts will remain the same.

During this transition, TSG is committed to providing the same high level of service that our clients have come to expect.

Please feel free to reach out to your primary TSG contact with any questions you may have regarding this announcement.

Kind Regards,

 

David Green                                      Patrick Gluesing

Chairman &CEO                                President & COO

New IRS Requirements Regarding Form 4506-C

New IRS Requirements Regarding Form 4506-C

The IRS has announced some important changes to how they accept 4506-C forms based upon their move from a manual process to an automated process through Optical Character Recognition (OCR) software.

They anticipate this will significantly improve their efficiency; however, this might dramatically impact your internal process of collecting 4506C’s from borrowers.

The IRS implemented this new automated process October 1, 2021, however, it will not be required until January 1, 2022. 

1. Must be a CLEAN typed copy of the 4506-C form.
a. Handwriting is unacceptable, except for the Signature and/or Sign Date and/or Title.
b. The form cannot be a combo of handwritten and typed.
c. No cell phone pictures of the form.
d. No reduced size of the form.

2. One person per form. (If NOT filling joint returns)
a. If borrowers did NOT file joint tax returns, you must have a 4506-C for each borrower.
b. List primary taxpayer on Line 1.

3. One Product per form per person.
a. Only 1 box can be checked per each product per each person.
b. Multiple boxes cannot be checked on the 4506-C.

4. The years being requested must be listed on Line 8.
a. No additional years should be listed on Line 8.

Social Security Administration SSA-89 Form Change

The Social Security Administration (SSA) has released an updated version of their Form SSA-89 as of 12/2020.

Please begin using the new version as soon as possible. You have until September 30, 2021, to transition to the updated form.

You can access a copy of the new version by following the links below:

Form SSA-89 (12-2020)

2021 MERS® QA Deliverables – Are you Prepared?

2021 MERS® QA Requirement submission process is now open and in full swing.  Is your organization prepared?

Use the eQARequirements Landing Page on the MERS® Member Website to determine if your organization has one or more QA deliverables due by the MERS December 31, 2021 deadline.

  • MERS® System QA Plan?
  • MERS® eRegistry QA Plan?
  • Annual Report?

Be in the know! MERS has revised the Annual Report Review criteria for the 2021 review cycle.  Changes to the review include:

  • Member Information and MERS System Security
  • MERS System Transactions accuracy and timeliness
  • MERS Documents General and State specific requirements
  • Third-party reviewer must successfully complete the MERS Annual Report Reviewer Training

Not sure where to begin? Here at The StoneHill Group, we work with you every step of the way.  We have successfully aced the Annual Report Reviewer Training and are prepared to assist you.  No need for last minute deadline stress.  Now is the time to get started!

Have other MERS QA requirement needs?  In addition to the MERS Annual Report Review, our MERS Services include MERS System Quarterly/Monthly Data Reconciliations and now offering MERS eRegistry System Data Reconciliations as required for eRegistry System Participants.  Our data reconciliations include side by side field comparison for all required and conditionally required fields as outlined by MERS and identify MINs that are listed in one system yet not the other to assist in a complete reconciliation process.

The StoneHill Group for your MERS QA Requirement needs:

  • Annual Report Reviews
  • MERS System Data Reconciliations
  • MERS eRegistry System Data Reconciliations – New service for eRegistry Participants!

Are you not currently a Stonehill partner? Are you trying to do this on your own? No problem, let us help! To become a partner of Stonehill and take advantage of all the great services we have to offer or for more information please contact sales@stonehillgroup.com. While your here check out our other services as well. We look forward to working with you.

Important Agency Updates Regarding New Field Review Requirements

Fannie Mae has updated their field review policy “to better align QC processes with available collateral data and industry-leading collateral tools. The combination of standardized data and Collateral Underwriter® allows for a more robust QC process, which reduces or eliminates the need for a field review in most circumstances.” Therefore, the new policy replaces the current appraisal QC requirements with a new collateral risk assessment (CRA) for all loans selected for a QC review in the random sample. To comply with Fannie Mae’s requirements, a CRA will need to be completed on 100% of Fannie Mae loans selected for QC that do not have a Property Inspection Waiver.

Freddie Mac mortgages selected for post-closing quality control reviews, the Seller must ensure the appraisal, or if applicable, other property valuation, meets Freddie Mac requirements. The process is expected to utilize desk reviews, field reviews, automated valuation models, multiple listing service data, public records data, online tools and/or other appropriate methods to validate and ensure the quality of origination information.  For Mortgages originated with appraisals, the Seller must obtain a desk review of the appraisal report to ensure that it accurately reflects the market value, condition, and marketability of the subject property and that the Mortgaged Premises is adequate collateral for the Mortgage. To comply with Freddie Mac’s requirements, a standard desk review will need to be completed on all Freddie Mac loans selected for QC.

FHA, VA, & USDA

There have been no changes to their field review guidelines. Field reviews on these loan types are still required per their guidelines.

If you are currently a Stonehill QC Client, a communication regarding the above changes was sent out on July 15, 2021. If you did not receive this communication or have any questions, please feel free to reach out to Donna Rowe, your Client Services Manager, at drowe@stonehillgroup.com.

Freddie Mac Updates to Re-Verification Field Review Requirements

As part of the Freddie Mac Seller’s quality control program, for Mortgages selected for post-closing quality control reviews, the Seller must ensure the appraisal, or if applicable, other property valuation, meets Freddie Mac requirements. The process is expected to utilize desk reviews, field reviews, automated valuation models, multiple listing service data, public records data, online tools and/or other appropriate methods in order to validate and ensure the quality of origination information.

For Mortgages originated with appraisals, except as described below, the Seller must obtain a desk review of the appraisal report to ensure that it accurately reflects the market value, condition, and marketability of the subject property and that the Mortgaged Premises is adequate collateral for the Mortgage.

If it is determined that the characteristics of the property or the scope of the desk review is insufficient to determine the accuracy of the appraisal or the adequacy of the collateral, a field review performed by an appraiser unaffiliated with the origination appraiser or appraisal firm is required:

Note: The Seller does not need to obtain a field review during the quality control review if one was obtained during the origination process and adequately supported the eligibility of the Mortgage for sale to Freddie Mac.

For more detailed information we recommend that you review the Freddie Mac Selling Guide, Section 3402.5 (E)(i)(A)(B), as well as review with your legal department, if applicable.